S&P Places Suncor Energy (SU) on CreditWatch Negative

Standard & Poor's Ratings Services said it placed its ratings, including its 'A-' long-term corporate credit rating, on Calgary, Alta.-based integrated oil and gas production company Suncor Energy Inc. (NYSE: SU) on CreditWatch with negative implications, indicating we could lower the ratings upon completion of our review. Our short-term and commercial paper ratings on the company are unchanged.

The CreditWatch placement follows Suncor's announcement that it has made an unsolicited offer for Canadian Oil Sands Ltd. (COSL) for C$4.3 billion in stock, and the assumption of C$2.3 billion in net debt. The offer is open until Dec. 4, 2015 unless extended or withdrawn. It is subject to some customary conditions, including that more than 66.67% of COSL shares outstanding (calculated on a fully diluted basis) shall have been validly tendered, and some regulatory approvals. Based on our forecast, we believe this transaction could result in pro forma funds from operations-to-debt of 30%-35% in 2016 and less than 40% in 2017, before the company's full production and cash flow from Fort Hills and Hebron reduces leverage in 2018. "At the same time, although the acquisition would increase Suncor's production by 15%-20%, we believe the Syncrude asset would continue to pressure the company's operating efficiency and profitability," said Standard & Poor's credit analyst Aniki Saha-Yannopoulos.

Suncor's "strong" business risk profile reflects our view of the company's large oil and gas resource base, large nondeclining oil sand production base, the integration benefits of its downstream segment, and robust profitability. We base the "intermediate" financial risk profile on the weakness of Suncor's five-year, weighted-average credit metrics at the currently low commodity prices, which we believe will continue throughout our 2015-2017 cash flow forecast period.

We will resolve the CreditWatch placement once we analyze the company's business risk and financial risk profiles, including Suncor's plan to improve operations and credit measures following the close of the acquisition. At close of the transaction, we might consider lowering the rating if we forecast the company's five-year, weighted-average funds from operations-to-debt is below 45%. This might be due to either a delay in production increase or unexpected downtime at Suncor's projects.

If the transaction is not complete, we would most likely affirm the ratings and assign a stable outlook. Although we expect Suncor's stand-alone credit measures to be weak in 2016, we expect 2017 credit measures to improve substantially as production from new projects comes online at end of the year.

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